TaxProf Blog

Paul L. Caron
Dean





Friday, August 16, 2024

Weekly SSRN Tax Article Review And Roundup: Eyal-Cohen Reviews Weisbach's An APA For Tax

This week, Mirit Eyal-Cohen (Alabama; Google Scholar) reviews a new work by David A. Weisbach (Chicago; Google Scholar), An APA For Tax.

Eyal-Cohen

The Administrative Procedure Act (APA) is a cornerstone of administrative law in the United States, providing a framework for the procedures and processes that federal agencies must follow. Its relevance to tax law has become increasingly significant as tax administration faces new challenges and reforms. This Article is one more piece in a series of articles, where scholars supporting tax exceptionalism (e.g. Caron, Lederman, Puckett, Weisbach, Walace, Zelenak, and others) debate anti-tax exceptionalism colleagues (e.g. Abreu & Greenstein, Hickman, Hoffer, Johnson, Infanti, Walker, and others) on the question of whether Treasury (and the IRS as its extension) violates the requirements of administrative law as laid out by the APA.  

This Article begins by briefly referencing the most notable anti-tax exceptionalism work of administrative law expert Kristin Hickman (Minnesota, Google Scholar), who developed an extensive body of academic research investigating the intersection of administrative law and tax law and the effects of the APA on tax administration. In her scholarship (e.g. here, here, and here), Hickman points out that the IRS and the Department of Justice have consistently pursued a limited interpretation of Mayo Foundation.  Hickman asserts that the Treasury as an administrative agency is subject to strict administrative limitations when it comes to utilizing temporary regulations and that subregulatory guidance documents, such as IRS revenue rulings and notices, should undergo notice and comment procedures as they possess a “legislative” nature rather than being purely “interpretative.”

In this Article, Weisbach continues to contest Hickman views claiming such interpretation impedes the Treasury’s capacity to promptly offer timely guidance especially when fighting tax shelters to a point of completely halting the IRS guidance process. He bases his opinion on recent tax rulings by the Supreme Court, as well as some lower court rulings, which have impacted administrative law with potential negative consequences for the enforcement of tax laws. He mentions the case of Loper Bright Enterprises v. Raimondo that invalidated the Chevron doctrine, resulting in reduced judicial deference towards the Treasury’s interpretation of Ohio v. EPA significantly broadened the obligation for the Treasury to address comments on regulations, enabling courts and litigants to meticulously scrutinize preambles to regulations for minor mistakes. In the decision of Corner Post, the statute of limitations does not start until the plaintiff is harmed by a final decision made by a government agency, which has the potential to extend the statute of limitations indefinitely, allowing new taxpayers to challenge regulations that have been in place for decades. Weisbach points out that the Corner Post exacerbates the issues caused by Loper Bright and Ohio by removing the time constraint for challenges related to those cases.

Recent lower courts decisions reinforce this trend and pose a risk of disrupting the tax guidance process. Weisbach mentions the Eleventh Circuit deeming a 40-year-old regulation invalid based on similar reasons as Ohio, i.e. the preamble failed to address a comment that the court considered to be significant. Additional regulations have narrowly escaped being declared invalid on this ground, such as a successful 9-8 ruling by the Tax Court in favor of the government in the case of 3M, and a 2-1 ruling in favor of the government by the Ninth Circuit in the case of Altera.

Weisbach predicts that from now on whenever the IRS asserts a deficiency relying on a regulation, taxpayers will thoroughly scrutinize the preamble and comments to identify even the smallest discrepancy and initiate a legal challenge. He argues these Supreme Court opinions will create an upheaval of administrative law within the tax system. They raise significant challenges for the issuance and validity of tax guidance, prompting the need for a tailored APA for tax regulations. Weisbach notes that the positive aspect is that these decisions are based on legislation and not on the Constitution. Consequently, he argues that if these statutes impede rather than facilitate the tax guidance process, we could modify them and are not hindered in navigating unfamiliar territory with the apprehension that courts will capriciously invalidate tax guidance. He calls for increased autonomy in selecting the necessary tax procedures instead of having them determined by the courts.

The Article then analyzes how reforms to the tax administrative process could be designed if the APA be applied within the realm of tax law, supported by case studies and examples. It inquiries about the recommended protocols for providing tax guidance, or in other words, what would a distinct APA Act for tax entail, if created. Accordingly, Weisbach identifies six key issues that have been impacted by these legal changes: arbitrary and capricious review, statute of limitations for challenging regulations, the standard of deference to Treasury regulations, methods of interpreting tax statutes, notice and comment requirements, and the use of temporary regulations and surveys the implications of the recent Supreme Court tax rulings on these key issues.

In the context of arbitrary and capricious review, Weisbach discusses APA section 706(2)(A)’s application to regulatory preambles. He critiques the Supreme Court’s decision in Ohio v. EPA for its stringent requirements on agencies to respond to all significant comments (even 1,100 pages long), leading to excessively lengthy and defensive preambles. This practice, Weisbach argues, results in regulatory ossification, where the rulemaking process becomes bogged down and inefficient. Preambles often serve as legal defense documents in litigation, rather than providing a helpful explanation of the regulation and the agency’s rationale behind the choices made. He suggests instead that the APA for tax should eliminate court review of tax regulation preambles and instead proposes that an executive agency like the Office of Information and Regulatory Affairs (OIRA) reviews preambles. Implementing this type of pre-emptive assessment would guarantee active participation from those providing comments while also preventing the subjective nature of post hoc court review. Furthermore, conducting the review while the regulations are being written guarantees its timeliness and ensures that the individuals responsible for drafting the regulation are actively involved in addressing the relevant issues.

The issue of eroding the statute of limitations for challenging tax regulations is highlighted in cases like Hewitt and Oakbrook, where decades-old regulations were invalidated. Weisbach also criticizes the Supreme Court’s ruling in Corner Post for effectively abolishing the statute of limitations by starting the clock only when a taxpayer is harmed. He proposes either shortening the statute of limitations specifically for tax or allowing pre-enforcement review of tax regulations to ensure timely challenges. The general period is six years, but the Anti-Injunction Act requires a shorter tax law period. The law prohibits pre-enforcement judicial review of tax regulations, so courts may not review their validity for years. Weisbach exemplifies that if a regulation is issued in year 0, applied to a taxpayer in year 3, audited in year 6, and takes 3 or more years to complete, even a three-year statute of limitations can lead to litigation a decade later, which seems long enough. Another option is to keep the six-year statute of limitations but change regulation challenge procedures to six years after the regulations are issued.

Weisbach also examines the deference given to Treasury regulations post-Loper Bright. While Loper Bright eliminates Chevron deference, it suggests a possibility for Skidmore deference and allows for discretionary authority when explicitly delegated by Congress. Weisbach advocates for a broad deference standard for tax regulations, arguing that Treasury and IRS attorneys possess superior expertise in interpreting the tax code compared to generalist judges. He also stresses the importance of retaining the flexibility provided by the Brand X decision, which allows Treasury to override court interpretations through subsequent regulations. This flexibility is crucial for tax administration in Weisbach’s eyes. Even with the deference standards above, courts will interpret tax statutes when there is no applicable regulation, or the regulation does not resolve the question. Allowing the Treasury to correct mistakes, which they often make, will improve tax administration. Even if a court decision seems reasonable, circumstances change. Brand X’s flexibility allows the Treasury to adapt to changed circumstances.

The Article’s advocates against the use of strict textualism for interpreting tax statutes, highlighting the need for purposive interpretation. Weisbach explains that the economic substance and business purpose doctrines have long been integral to the tax law, ensuring that the statute’s purpose is honored even when the literal text might be exploited. He proposes codifying purposive interpretation and explicitly allowing the use of legislative history in determining the purpose of tax provisions. Nevertheless, Weisbach clarifies that requiring such purposive interpretation does not mean taxpayers, tax lawyers, and courts would not prioritize tax law words. A good tax lawyer and judge must read carefully and precisely. Purposive interpretation provides backstops, Weisbach argues, by filling gaps or overriding inappropriate word use. With a textualist approach, tax law cannot work without a backstop.

On the issue of notice and comment requirements, Weisbach addresses the procedural requirements for issuing subregulatory guidance, such as revenue rulings and notices. He refutes the argument that these documents must go through the notice and comment process, emphasizing their interpretive nature and non-binding status. To ensure clarity, he suggests adopting an approach that allows agencies to choose whether to make a rule binding through notice and comment, aligning with Jacob Gersen’s “shortcut” solution (here). The question remains whether taxpayers can be penalized for not following subregulatory guidance. In Weisbach’s opinion, Treasury should impose penalties without notice and comment to encourage taxpayers to report income and tax liability carefully. While the standards for penalties are complex (as only tax law can be), negligence is the general standard. Due care means considering all reasonable interpretations of a statute.

Finally, Weisbach discusses the use of temporary regulations and the challenges posed by Hickman’s arguments that they must comply with APA procedures. He concludes with a critical evaluation of recent reforms, highlighting both their successes and shortcomings. He advocates for retaining the flexibility to issue temporary regulations without full notice and comment, emphasizing their necessity for quick and effective tax administration. The Treasury has the authority to issue temporary regulations when it determines that their use is necessary. Courts should be devoid of any authority to scrutinize it. In Weisbach’s eyes, this rule would provide the Treasury with slightly more regulatory authority than it currently has (through the workaround) but would simplify the process of exercising that authority and make it clearer for taxpayers to comprehend when new guidance becomes obligatory.

The Article offers a thorough proposal for an APA tailored to the tax system, addressing critical challenges posed by recent court decisions. Implementing these recommendations, along with suggested improvements, may lead to a more effective and resilient tax guidance framework. It is worth noting that this comprehensive analysis of the challenges facing tax administration due to recent judicial decisions could benefit from more concrete examples of how proposed changes would be implemented in practice and had they been applied in past tax opinions. Future research might also explore the implications of these changes on taxpayer behavior and compliance costs. Weisbach’s recommendations offer a reasoned framework for adapting administrative procedures to better suit the needs of the tax system. For those supporting occasional diversion from general administrative law requirements (akin to immigration law and national security and foreign affairs) it serves as a blueprint to practicing tax exceptionalism.

Here's the rest of this week's SSRN Tax Roundup:

https://taxprof.typepad.com/taxprof_blog/2024/08/weekly-ssrn-tax-article-review-and-roundup-eyal-cohen-reviews-weisbachs-an-apa-for-tax.html

Scholarship, Tax, Tax Daily, Tax Scholarship, Weekly SSRN Roundup | Permalink